Surveillance: Golden Age For Tech, Ives Says

bit frustrating for us actually, as as duration balls. At least in part, we've been bullish because we we thought risky assets were being incredibly complacent with respect to the outlook across a broad a broad range of factors. We've been thinking about this and then trying to piece together some sort of understanding of why that might be the case. I think the story we've settled on really is that

this is a position unwind. So what you had was the market was positioning for fiscal stimulus and a and a blue sweep. Let's let's be somewhat glib, and that meant being short dollars, being long risky assets, and being in treasury curve steepeners, possibly not necessarily shut outright duration, but in treasury curve steepness. So what we've seen is even though yields have gone up, the curve is actually flattened.

And we've seen equities being unwound, and and and the dollar and the yen rallying, which were probably currencies where you had short positions. Certainly the dollar is definitely one way they've been short positions. So we kind of think this looks more like just a clear out of some of those positions, mainly because the virus stat has got worse. Also because I think some concerns a bit more latterly ever, have arisen that the election result might be closer, might

be contested. Future is right now negative ectinas. Joe and Ferrel mentioned recovering James A. Thy Okay, so you have ownership of equities, you have no money to put to work. You have to have a framework, a view out there. Where is they're out there? Is it two twenty one or is it November four? Yeah? I mean, ideally we'd like to be long term investors, and we would like to take the long view. I think certainly, if you are an equity investor, if you're you know, my equity colleagues.

These guys look at the quality of the firm, the quality of the balance sheet. They're not making an economic call um, and they will definitely be able to look through political events like this because they will be comfortable that the company they're buying is a good company at the right price. That's not the case for all types of investment, and that's certainly not the case for all

types of investor. So in our asset classes a bit more difficult because that the prices themselves are very much going to be a function of the result itself and what that means for policy going forward. So depending on the type of investor, you will be able to look through this event to a greater degree. We would find it a bit more difficult to completely ignore. So we will be managing our risk levels and exposures accordingly. Alright,

so managing risk levels. And yet you said that it's been a frustrating week for you as a dereach ball. What's the head here? Well again I would have said that, you know the curves direction and so aituation ball. We've been running you know, bullish duation positions and we've got some long end steatness on in the US, we're kind of both of those have gone against us this week. Now.

Our FX positioning has very much been favorable to the moves this week because we've been positioned along the dollar and along the yen, and along the Swiss franc and short some of the risky currencies, and so FX has definitely been a good diverse far and a good hedge for us. But again, going into the event itself, I think the outcome is a lot closer than than you know. Nate Silver, for example, is calling it, and so I find it difficult to build a portfolio that I think

will be truly robust to every possible outcome. So if that's the situation, I'm going to be happy running some risk in there, some short duration positions in Europe, for example, if if yields do go really high, I think, you know, European yields will get dragged to some degree we've seen it's not a huge amount, but they will get dragged

a bit higher. So I can go in kind of still having a bit of a small long ration bias, some shorts in Europe, some defensive positions in effex but just taking the gross level of risk down so that it's you know, we're not seeing huge P and L songs, James, How why do you think this market is priced in the head winds to the recovery that we're seeing develop in Europe and our sware at the moment, I'm looking back across asset crewed the dollar dollar bottomed out end

of August, start of September Ozzy and topped out around a similar time. Crew topped out around a similar time. Equities peaked around a similar time. That was two months ago, James, I'd argue this market was probably ahead of some of

these risks. What do you say to that? Yeah, Again, broadly speaking, I think we'd gone too far, too fast quite some time ago, and it really didn't need the recurrence of the virus spread that we had seen for the market to take some of the air out of that, because again, we were just priced at the extreme of the probability distribution. We were pricing a utopian future where earnings would almost instantly recover. Policy was going to be

sustainable and effective a it's the piece. Everything was going to be hunky dorry, and you know the certainty around that is somewhere close to zero. So that was that was really quite ridiculous market pricing, and we've we've seen that that you know, we've seen some pushback against that. To go to your original question, how well is the market price in the outlook, I would still say, broadly speaking, terribly. Looking at US equities doesn't give you a good picture

for global equities. European equities is viewed, as you've described, have had a terrible time at horrid time. Valuations there are you look incredibly low relative to the US. There are good reasons for that. That still doesn't mean that

they're cheap even at these levels. But you know a lot of assets, certainly in U S equity space, really have not taken account of the probability distribution of how this will play out, but also taken account of the damage that has been done and will continue to be done to economies and business models. James, they just looked and you can do this, folks in the Bloomberg, which

is magical. You know, a large shirt of the value line geometric index, which is an old war horse, and there's some really interesting mathematics and takes out a lot of the emotion, a lot of the dynamics of the movable feast of all these big capped stacks. It is extremely well contained and it is, as you said earlier, basically a pullback. How do you know when a ballmarket ends? How do you know, as a fundamental guy, when a

ballmarket ends? You absolutely don't, Tom, there is the answer, you know in the rear view mirror, I thought, I noted. I can't quite remember who one of the cell side analysts was drawing comparisons to this earning season in the US with the q on two thousand earning season where you've got actually solid looking earnings, lots of beats versus expectations, and yet equity performance on a single name and across

the index basis was was absolutely diabolical. Nobody in March two thousand or April two thousand was saying that was the top of the NASDAC and it was over. It was only probably the end of the year when you could look back and go, yet that we're kind of

done here. That's that's the highs that we've seen, and it takes a long time to get back to those highs when the overvaluation is so extreme, so absolutely impossible to know when it's the top, especially when you live in a world of post hoc justification for extreme valuation, just using rather glib narratives which don't stand up to a lot of scrutiny, and and that that's been the case for a lot of stock valuations in this period. So I think we will only know in the rear

view mirror when it was that, when it was the top. Hey, James Grazer, catch ump as always, James Anthony. There of amity standard investments, Thank you, sir. Apples Yes Falling After the company reported iPhone sales the missed estimates, the CEO Tim Kirk cautioning that the latest iPhones who have has been well received, but the company is facing some strains due to the coronavirus. If you look at iPhone, we are constrained today. How long we will be supply constrained,

it's hard to predict. We're supply constrained on Mark, we're supplied constrained on and we're supply constrained on some Apple watches as well. We're working really really hard, uh to remedy those as quickly as we can, but at this point I can't estimate when when we'll be out of that. And that was the problem, and not just for Apple but for many other companies that we put it after the close. Tom it was about the outlook, the lack of his ability that so many of these companies have.

I just call it all American uncertainty here around very good financials as well. Danielize as an uber bull and all this he has been across all of media talking up out one year out, two years out, five years Daniel lives. Can you write today for wed Bush with a two and five year model or is the uncertainty so great you've got to pull in your timeline? The answer a great question me. I continue to sort of

view it as near term uncertainty. But let's say, in the case of Apple, install base hasn't upgrade their phone three and a half years, so I think the hand up demand when I look out, I even think over the next twelve, eighteen, twenty four months, there's a would have more visibility when you look at Apple from an install based perspective. But no doubt I mean that you guys see farest through the trees here. Intact, we continue

to be bullish. You know, I looked down at the people looking at ninety days out or even a year out and if you take any of these juggernauts and model them two years or particularly five years, it's shocking the growth. Is that growthiness still there represented by revenue growth, But can it come down the income statement and persist out five years. Yeah. I think it's a golden age for technology, which speaks to our bullish it's over the last few years. I think we're only the middle innings.

You look at some of these names, the profitability profile is dramatically higher. Look at Apple in terms of services, I mean that gross margins about double the hardware business, And I think what you're seeing is it's very easy, especially in the jittery tape, to get my open and nervous on some of these prints and guides. But for Apple, the supercycle hasn't even started. And in terms of our Asia checks, we think pre order activity is more than

two xs iPhone eleven. So I think that's why I when I look at Apple and sort a knee jerk reaction. You look at them next year or two and I think this is ultimate A hundred fifty stock six and nine months from now. So down what you think of stocks down about from the September Hind, I think part of it is just general nervousness going into the supercycle. China obviously is the key, that's the hearts and lungs

of the overall cycle. And if you look, you know, and you saw this quarter, I think there's just general nervousness that you're not going to see that demand valuations had a huge re rating and you start see perfection built in, and I think you're seeing a risk off overall intech just going into the next week. But I believe it short lived. That That's why I still think it's green light to own tech. And I think I look out over next year and I think tech stocks

are up another twenty plus. That's been your code through much of this year. Say, it feels like a rolling cold down, and for much of this year it's been dead on. But something happened in already September. Then some people are asking whether we've already seen the pull forward for Apple through the shutdown, and this is not about waiting for the iPhone twolve. This is the payback for a really decent quarter when the world was shut down.

What's your response to that? Then, Yeah, I've seen you've seen the pull forward on Max and obviously on iPads. You've not seen the pull forward and iPhones, and I think that's really the key here. You're going into what I've used once in a decade supercycle for Apple. So that is still on the horizon, especial when it comes to China, because you got the installments, it has an upgrade their phone and the stack that gets read on services, which next year that's going to be north of sixty billion.

And that continues to be the crux of the thesis here in terms of that's playing out in this quarter or doesn't change that whatsoever For me, Dan, One aspect of the big tech earnings that strikes me as odd is that they continue to trade as a monolith by large In large part people talk about big tech in tandem as though their fates are intertwined, and yet their actual business models are vastly different, whether it's an AD driven model, whether it's a Google search model, whatever it

may be. And then you have Amazon, which knocked it out of the park in terms of projections, and people still are punishing them. Do you expect divergence in the fates of these shares and who will be the loser in the next year? Yeah, I think maybe you saw a little of that divergence with Google, especially over the last three or six months, and obviously they knocked it

at the park last night. From an advertising perspective, now, I do think a lot of that could be on the antitrust as you start seeing more and more pressure from antrusts going to next year. Specifically, if you see a blue wave, the Googles and the facebooks, you know, could potentially trade a little different than the Apples and the Amazons and the platform play in terms of those secular trends. But for now, you know, we do view them as a group in terms of things that I

also put Microsoft in there. The platform play isn't the stronger getting stronger, and I think you're seeing that in this environment. COVID's accelerated the growth rates and the consumer and the enterprise by one to two years, and I

think that's playing out here. Even though you'll see some of the knee jerk reactions on well called Sandbad Guide and from the likes of Amazon well Dan, they're increasingly being treated as the haven investments because of what you talk about the stronger getting stronger, and yet the valuations, the multiples are getting higher and higher, and people are saying, well, it makes sense with such low yields. How much would you change your call if benchmark rates in the US

went up. Yeah, I think that could change things. But I also think what's starting to happen is investors of you in them some of the parts you look at Amazon, e WUS, e commerce, you look at you know, an Apple from those services and from a hardware perspective. So I do think we'll start to happen is in terms of the breakup, talk to some of the parts, the reratings that you've seen. I think that's the key, and also they are their safety blank and names in the

category five storm. But there on the other side you start to see I just start seeing more of a risk on trade. Tech continues to lead the market high and I don't see that changing here in terms of just the shifts that we're seeing, and I think it's having through earning season. Dan one of the great questions here and I just did a quick Pharaoh interpolation of the share buyback program of Apple, and folks basically out ten years, they go back to where they were in

in terms of share, number of shares outstanding. Dana's other companies have tried that, Intel IBM and that story didn't work out. So good. Is Apple correct to be so aggressive of buying back shares. It's hard to argue with the strategy in terms of what you've seen on the net neutral cash policy, they're not acquisitive and the body back combined with and again the reason I think it hasn't worked for some of those companies they didn't have a golden installed base and and anything close to what

the iPhone is within nineties nine embercent renewal rate. And I think just given they have more cash in some countries, they're not going to acquire Well, that's from an investor perspective, I think the right thing to do. I happen to agree with you. But what I find stunning is the margins of the growing service sector. Do they sustain those

forty fifty even margins in service? Well? I do, and that's why I think the services business, which just take and we said some of the parts, I think that services business is worth nine to nine billion, and that's been a key part of the re rating in the stock over the last six and nine months as it's held up like Rocket Gibraltar. If you've looked at the services business and I think those margins teflon like and continue to I think stay where they are or potentially

go higher. And that's the key part of the bull thesis. What do you make down of the fact that China sales of the iPhone and just in general dropped revenue for Apple? The idea that perhaps this has to do with the new phone coming out, but even more so perhaps the tensions that are growing between China and the US when it comes to tech. Yeah, I think tensions that's been there posed a child for US China trade war,

just overall cold tech war. But I think this quarter is a throwing quarter for China because it all comes down to you see a pause ahead of iPhone twelve. I mean, we believe you could see growth in China double digits start in the summer quarter. That's why I wouldn't read into this. In other words, it's a scary headline. Stock will be down. Nietzscherk. I think three months from now we sit here, we're talking about how is China

that strong in terms of iPhone twelve. That's based on what we see in terms of checks and pent up demand, and we'll see you in three months. The bull is still a bull. I have wet bush on the site, the blanket in a cap five storm right now, Lindsay pigs that joins us right now from Stapleward thrill that she could join this morning, Lindsay, I want to go right to that. Michael McKee showed the oddities of the moment. A savings rate that is double digit, that's not normal

for America. What are the ramifications of that high savings rate. No, it's certainly not normal. And when we see American squirreling away that type of cash, that that amount of wealth, it really speaks to the uncertainty that the average American is feeling about their financial footing going forward. A fourteen percent savings rate translates into over two trillion in accumulated wealth and accumulated savings that can be deployed out into

the marketplace. But right now, consumers are looking out at the recovery, they're looking out at the prospect of a resurgence of the virus and potential further restrictions or shutdowns, and the consumer is very nervous, and in fact, rather than immediately spending that wealth, they're deploying that to their savings account and sitting on that additional savings. Lizzie just quickly,

of course, the distribution for those savings not equal. Where in society is that money sitting right now and how likely is it that it will be spent? Well, I do think there's a disproportionate amount of the savings that is being held at the top wrong of the income ladder, But with forbearance, with generous unemployment benefits, there is a sizeable amount of wealth that has been captured even in

the middle or bottom wrongs of the income ladder. So yes, there is a little bit of a skew towards the top. But I do think that when we look at overall, the average American may be better off than they were

pre pandemic, or at least on somewhat stronger financial footing. So, going back to a point you made earlier, I do think that this looming fiscal cliff that many are concerned about may not be quite as ominous as previously assessed because of that additional savings or that additional wealth that

the average American is facing right now. That's where I wanted to go if we could game out how long long households have to maintain spending or even just reduce it a little bit, perhaps to edify these these forecasts for a blockbuster holiday season, how long do we have before we sort of hit the wall where we either need more fiscal support or we actually see the slowdown that so many people have predicted would already have happened

and yet hasn't. Well, if we assume that the economy continues at this pace, the consumer does have several months to eat through that accumulated wealth that should carry us well into the first quarter, even independent of a fifth round stimulus package. But we also have to recognize that the virus is far from contained and that remains the number one risk of the economy, or should I say, the policies aimed at stemming the spread of the virus

remain the number one risk. And if in fact, we do see a resurgence towards the end of the year leading to further restrictions, further lockdowns, resulting in further business closures, job losses, lost income, revenue opportunities, well, we could see growth regardless of the savings or that wealth accumulation. We could see growth slow significantly or even fall into net negative territory depending on the depth and duration of that rebound or that resurgence of the virus. Lizzie find a

question for me. I think it's the biggest question for any economist in the United Stace right now. Does this U S economy in this recovery go the way of

China or go the way Europe? By your end, I think right now, the risk is that we see a similar scenario that was playing out in Europe right now again, that second round resurgence of the virus really undermining the improvement that we've seen July the September, that was a welcome step in the right direction, a record bounds, but again reflecting the fact that we're simply reopening the economy, so really emphasizing the power of reopening the economy bouncing

off of those low, low levels that we saw in the second quarter when businesses were forced to close and individuals were forced to to stay within the confines of their home, and it really highlights the ongoing detrimental impact of keeping the economy closed. Should we see new policies forced the same scenario as we head towards the end of the year, And that's the issue right there, Lindsay right to catch out with you, gets ahead from you Lindsay.

P Exada State Fold chief economist Rod Felson with us with Prudential. I want to get right into this because this is the topic and one of the topics of thinking into the weekend around all the crowded news. He is Vice chair Prudential Financial Lisa and Rob Fells and really simply is considering getting people back to the office or is it a a permanence to this work from home? Rob, Lisa and I have heard forty two different opinions on this. What is the learning curve right now of people thinking

about this? What's the thinking now versus what the thinking was in May? Yeah, so Tom, I think the thinking is that we're not at a spread and we're in a marathon. And with particularly the most recent data coming out, it looks that many companies, most I would say, are actually extending out even further the time that they think they're going to be in this remote environment. We've done

that recently. We told our employees that will be in earlier than July of the next year that we're looking to have them come back in any kind of material way. And I think that's a reflection of a couple of things. One is, in a survey that we did recently, it indicates that actually remote work is working. Um. It's relieving the stress that a lot of these individuals are experiencing

from the pandemic of child care. But you know, helping care, balancing work life, UH and doing it doing it in a remote environment has actually helped to ease some of the pressure associated with that. UH. And the second thing is that productivity is actually held up quite well in a remote environment. UM. Sixty percent of our survey indicated that their productivity is actually at or above where it

was you at the office. What I'm hearing in folks, this goes to a great team of Bloomberg surveillance worldwide. I really can't say enough about you know, you see the three of the four of us on arrowhere, there's people behind us trying to make the sausage every day. And Rob, what I'm hearing is the the employees actually feel they're working more hours at home than they were in the office excommute. Is that what your research shows absolutely,

Tom h to two things on that. One is there's three Actually there's been a blurring of the of the start in the end of the work day. Uh. And it's tending to start a little earlier and end a little later to to to um. In the survey, sixty five individuals have taken sixty less vacation year to date than they did than they did uh last year uh and three on average, they're commuting an hour less every day, but that they're reinvesting back into work, so it's not

more leisure time, it's actually more work time. Yeah, I will say Rob. There was a story in the Wall Street Journal today, the lead of which was what would you do with an extra hour each day? And the answer is for many people work more. Basically, this is unsustainable going forward. A lot of people, if you talk to them, they are medicating with alcohol in the evenings. They're wondering what they're going to do with their children.

They're not necessarily feeling the satisfaction that comes from working from home. When it comes to this beautiful image of not having to commute, do you see this as the new reality or do you see this as people hanging on with all that they can given the fact that they don't have options to go on vacation anyway, And it is okay for now but then they're going to go back to the office. Yeah, listen, it's a grind. There's absolutely no argument about that. And that comes through

our survey as well. And you know, well remote has helped with the stress associated with the pandemic, the reality is that there's still very stressful for individuals. You know. I think a couple of thoughts on that. One is if I think about the productivity gains that we're getting, uh, you know, and how much of that can be retained long term. I actually think there is a real productivity

enhancement here. There is an acceleration and you know, what we call the future work the adoption of technology and digitization processes out of necessity, and that's going to be sustainable. But the remote and and and then secondly the remote piece of it. You know, our surveys indicate that to three quarters of the individuals that were survey indicated that they would like to continue to to have some element

of remote work on a go forward basis. Now, I don't think anyone wants to be fully remote on to go forward is a most people don't want to be fully remote on to go forward basis. But both our internal company surveys and the external survey indicate that people have gotten used to this remote and think it's actually uh a an enhancement to work life balance uh and

they'd like some element of that. But going forward, and I think that when we return to the workplace, therefore, it's gonna be a very different experience in a very different place for individuals because it will I think having hybrid models of remote on a go forward basis that

look very different than what we have predependemic. A lot of people would agree with you, But I want to go back to something that Bruce Flatt, who is the CEO of Brookfield as Management, said, and it was what we heard earlier in this segment where he said that if you go on the street, ask nine out of ten people, they want to go back to the office. They want to have some sort of communication face to

face with colleagues. Do you feel like from your conversations in your research, people want to be in urban centers, even if they're not going to be necessarily going to work every day. They want to be able to see and physically experience one another and the world at large. Or do you think that perhaps this is wishful thinking by a real estate investor, Well, it is a real

estate in faster. So a good note on that to to two points one is uh, right now in the pandemic, our surveys are not indicating that people want to get back into the office place. Actually, our own internal survey eighty seven percent of our employee said we do not want to go back. Uh. And it's similarly high percentage individuals and our external surveys have indicated that they at this point in time don't want to go back. Now post the pandemic, do they want to go back into

the work is absolutely, but again in a modified fashion. UM. I'll refer to our own internal survey we have before the pandemic, about one of our people worked on either in three or more days a week remote UM. When we did a survey uh during just you know, more recently post a pandemic, UM, three quarters of our employees indicated that they want to be remote three or more days a week. I be two percent of our employees said they want to be remote to or more days

a week. Now there was a small percentage that wanted to be fully remote. So I think people missed the human interaction associated with being at the workplace. Absolutely, that doesn't mean they want to return to a five days. This issue is not going to go away. Rob. We would love to have you on again. Rob Fails and with decades of experience in real estate, working of course with Prudential Financial their commitment to Newark, New Jersey. He

is their vice chair. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio